Alltel focus now on service, customers

Analysis: Business as usual for now, but watch auction

WASHINGTON (MarketWatch) -- Alltel Corp. struck gold for its stockholders by accepting a generous $27.5 billion buyout offer, but whether the deal will benefit its 12 million customers is not as clear.

The wireless-phone company's agreement earlier this week with two private-equity firms to be sold for $71.50 a share represents a terrific price for shareholders, analysts agree. Most have advised clients to take profits now instead of waiting for the deal to close. See full story.

Even Alltel executives and major institutional investors were giddy. "I don't think anybody thought we'd get $70-plus a share," Chief Executive Scott Ford said at a press conference Monday in Alltel's hometown of Little Rock, Ark. One large shareholder, he added, "even answered the phone with a 'Yippee!'"

Indeed, some industry participants even say that the investment firms paid an excessive sum -- "crazy," in the words of one analyst -- to acquire Alltel
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With shareholders already taken care of, the looming question is whether Alltel's customers get treated well, too. Alltel offers mobile service in mostly rural areas in a wide swath of middle America, operating the largest network in the United States on a geographic basis.

The problem is this: Because the buyers have to take out big loans to finance the deal, they will have to devote the lion's share of the cash Alltel generates to pay off lenders. If too much cash is devoted to paying down debt and not enough to maintaining and improving Alltel's network, customers could experience more disruptions or miss out on innovative new services.

Of course, rival mobile-phone companies would like nothing better; it would give them a chance to poach dissatisfied clients. Yet Ford, when discussing the deal on Monday, insisted convincingly that Alltel will continue to invest in its business.

He said that the acquiring firms, TPG Capital and the Goldman Sachs subsidiary GS Capital Partners, are not going to milk Alltel for all it's worth to quickly pay off the debt.

"They want to invest in the wireless business. They want to grow the wireless business," according to Ford. "I don't think you'll see much change."

To Ford, the company's phone customers should view the buyout of Alltel like the purchase of a car or home.

"You put some money down, you borrow the rest," he said. "But unlike a car or a house ... a business generates cash that you can use to pay the debt off."

Indeed, Alltel has invested extensively in its wireless network even as the company shelled out $2.7 billion to shareholders over the past few years. In the future, that money will simply go to TPG and GS Capital; the firms can tap it to refrain from unnecessary reductions in capital spending that could hurt the company's wireless service.

What's more, the two have relatively easy access to Wall Street capital, and should be able to fund Alltel if it needs a quick infusion of cash.

Protecting their investment

From a strategic point, TPG and GS Capital have additional incentive to invest in Alltel. Otherwise, subscriber growth could taper off sharply or even reverse itself.

Slower growth in turn could slash the value of Alltel and increase the risk to the firms if they try to sell the mobile company in a few years, as Wall Street widely expects.

'If Verizon or AT&T had been there and paid more, we would have sold to them.'
Scott Ford, Alltel CEO

Almost everyone in the industry believes that TPG and GS Capital eventually plan to market Alltel to a domestic rival such as Verizon Communications Inc.
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Sprint Nextel Corp.
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or AT&T Inc.
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Even a foreign owner like Vodafone Group Plc
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or China Unicom Ltd.
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are considered realistic possibilities.

But if the phone company's value declines, those carriers would likely offer less than TPG and GS Capital plan to pay for Alltel. After all, those very same phone carriers found the winning bid too high.

"If Verizon or AT&T had been there and paid more, we would have sold it to them," Ford said.

A key test of the investment firms' intentions could come later this year once a major auction of wireless spectrum takes place as expected. The Federal Communications Commission plans to sell a much-desired block of airwaves in the 700-megahertz range. Dozens of companies, big and small, are expected to bid.

The spectrum is seen as particularly valuable for mobile carriers that want to expand their networks and deliver speedy wireless access to the Internet. In the future, wireless companies expect to generate an increasing amount of their growth from data and Internet services.

While some analysts suggest the high debt levels of Alltel's prospective new owners could deter the carrier from active bidding in the auction, others predict Alltel could be more aggressive.

"Deep-pocketed owners can help the company raise money to participate in the wireless auctions," according to Rich Nespola, the longtime industry consultant who runs the Management Network Group Inc.

Ford, for his part, is not tipping his hand to customers -- or competitors. "As a participant in a spectrum auction, you have to be quiet about what you are or are not going to do."

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